Can You Roll Closing Costs Into Your Mortgage? Weighing Your Options

When buying a home, closing costs represent a significant financial hurdle. These fees—covering items like mortgage origination and transfer taxes—typically range from 2% to 5% of your home’s purchase price. For many buyers, this means facing thousands or even tens of thousands of dollars in additional expenses on top of a down payment. But what if you could roll closing costs into your mortgage instead of paying them upfront? Let’s explore whether this strategy makes sense for your situation.

The Appeal of Adding Closing Costs to Your Mortgage

Many homebuyers find the prospect of incorporating closing costs into their mortgage attractive for good reason. Here are the primary advantages of this approach:

Reduces immediate financial pressure. Saving for both a substantial down payment and closing costs simultaneously creates enormous strain on your finances. By rolling closing costs into your mortgage, you spread these expenses across your monthly payments, making the financial burden feel more manageable month-to-month rather than requiring one large lump sum upfront.

Accelerates your path to homeownership. Waiting to accumulate enough cash for both a down payment and closing costs can delay your purchase indefinitely. By consolidating these expenses into your mortgage, you can buy sooner and start building equity immediately rather than spending additional years saving.

Inflation works in your favor over time. With a fixed-rate mortgage that includes your closing costs, your monthly payment remains constant for the entire loan term. However, the actual value of money decreases due to inflation. This means you’re essentially paying back borrowed money with dollars that are worth less than they are today—effectively making your closing costs cheaper in real terms.

The Hidden Costs You Need to Understand

Despite the appealing benefits, rolling closing costs into your mortgage comes with real disadvantages that deserve careful consideration:

You’ll pay interest on these fees. This is the most significant drawback. By adding closing costs to your loan balance, you’re borrowing money specifically to cover them, which means interest accrues on top of these amounts. Over a 30-year mortgage, this compounding interest can substantially increase what you ultimately pay for those closing costs.

Your loan-to-value ratio becomes problematic. Lenders restrict how much they’ll loan relative to your home’s value. Rolling closing costs into your mortgage increases your total loan amount, which can push your loan-to-value ratio above safe thresholds. If you borrow more than 80% of your home’s value, you’ll be required to pay for private mortgage insurance—an additional monthly expense designed to protect lenders against foreclosure risk. This extra cost further increases your monthly obligations.

You’re committed to decades of payments. Unlike closing costs paid upfront, rolled-in costs extend throughout your entire mortgage term. If you have a 30-year mortgage, you’ll be paying these originally-small fees for three decades, with interest compounding throughout.

Making Your Decision

Whether you should roll closing costs into your mortgage depends on your specific financial circumstances. If you lack sufficient savings to cover both a down payment and closing costs, and your lender permits this option, it might provide necessary flexibility. However, you must accept that you’ll pay significantly more in total interest and commit to these payments for decades.

Before proceeding, calculate the total interest you’ll pay on your closing costs over the loan term. Compare this figure against the financial strain of paying closing costs upfront. Sometimes the interest costs exceed the benefit of improved cash flow. Understanding this trade-off allows you to make an informed decision aligned with your long-term financial goals.